Amazon spends money to make money . . . or so it hopes [Updated]

Amazon.com has been one of the stellar successes of the digital economy, but you wouldn’t know it from a surface look at the earnings report it issued on Tuesday, followed by investor reaction.

The online retail giant had record sales of $10.88 billion for the quarter, but that was offset by big increases in its spending. As a result, its profits were much less than analysts had expected, at $63 million, down dramatically from $231 million in the same quarter last year.

And if that’s not enough, get this: Amazon predicted that, in its next quarter, its profit could be anywhere from $250 million to a negative $200 million. That’s a $450 million range, much of it colored red.

The shares plummeted as much as 19 percent to $184.59 in late trading, following a decline of 4.4 percent at the close yesterday in New York. They lost 11 percent to the equivalent of $204.28 as of 9:55 a.m. in Frankfurt. The stock had gained 26 percent in 2011 and set a record of $246.71 this month, raising pressure on Amazon to deliver stronger results.

So what’s going on here?

Amazon’s spending has increased dramatically as it enters a new phase of its existence. In September, the company announced four new Kindle devices, including its first touchscreen tablet, the Kindle Fire. In addition, it’s adding on 17 new distribution centers.

“September 28th was the biggest order day ever for Kindle, even bigger than previous holiday peak days – we introduced Kindle Fire for $199, Kindle Touch 3G for $149, Kindle Touch for $99, and our all new Kindle for only $79,” said Jeff Bezos, founder and CEO of Amazon.com. “In the three weeks since launch, orders for electronic ink Kindles are double the previous launch. And based on what we’re seeing with Kindle Fire pre-orders, we’re increasing capacity and building millions more than we’d already planned.”

Building “millions more that we’d already planned” would seem like a good problem to have, except that Amazon’s likely selling the $199 Kindle Fire at a loss. iSuppli, known for its teardown and analysis of shiny new gadgets, estimates that it costs Amazon almost $210 to build a Kindle Fire. If it’s selling millions of them, it is going to be losing a lot of money to get them out the door. If it sells 10 million Kindle Fires, Amazon could be losing almost $100 million.

Of course, the Kindle Fire is designed to sell Amazon’s digital content – books, music and video. It also has a nascent Android market in which it sells software for tablets that use the same operating system as the Fire. Amazon’s clearly hoping that the Fire’s digital salesmanship will make up for the hardware loss.

There are high hopes for the Fire. It’s been called the first tablet that could challenge the iPad in terms of brand awareness and consumer friendliness. Certainly, if it’s got millions of pre-orders, Amazon’s selling the Fire at a much higher rate than other Android tablets, which haven’t exactly set the world ablaze (and that pun ‘s intended, bubba).

In making this move, Amazon clearly is challenging Apple, which dominates the tablet market, and it’s doing so based on price. Amazon already competes this way against Apple in music and video, though iTunes remains the juggernaut here.

That’s what has investors nervous. It’s a risky bet, and one that – based on Amazon’s projections for its crucial holiday-season quarter – is clearly fraught with uncertainty. If Amazon scores, it wins big. But to do so, it fundamentally changes Amazon’s cost structure, putting it in uncharted waters that – given Apple’s presence – are rough seas indeed.

Amazon is investing (and hiring) while many other American corporations are milking incumbent businesses, under-investing in research and development, and hoarding cash. To the chagrin of of some traders, Amazon is distinctly NOT “maximizing near-term profits”–it is sacrificing near-term profits. It is making less money now in the hopes of making more money and creating more value later. And it is ignoring the howls and screams of short-term traders who couldn’t care less about Amazon’s long-term prognosis, add nothing to the economy, and just want to make money now.

Doesn’t sound much different that the way cell phone companies reduce the cost of a new based on future services usage. Risky in that it isn’t a true subscription model but they are going to sell a lot of e-books, music and programs to a somewhat captive audience

Bravo to Henry Blodget’s views!!!! We need more businesses in this Country who care about the long term success of their companies rather than the short-term stock price to satisfy day traders. That’s why its best for companies to promote from within rather than recruit “superstar” CEO’s from outside.

I worked at EDS for many years and that company was destroyed by these outside mega CEOs who cared more about pleasing CNBC pundants than taking care of their own companies. How ironic that it was eventually bought by HP who has gone thru the same destructive process.

Amazon runs an online retailing operation on razor thin margins. Any hiccup and they’ll lose money. In addition, the effort of states like California to collect sales tax appears to be gaining traction. That would take away one of Amazon’s primary competitive advantages. I’d call that a hiccup.

The idea of a retailer going into competition with a company like Apple using outsourced products doesn’t seem like a winner to me. Imagine Sears Roebuck going into competition with IBM. Imagine Walmart going into competition with Microsoft.

The lure of getting an iPad clone on the cheap will definitely boost sales. However, a cheap imitation iPad won’t come close to the real thing. It reminds me of a marketing event years ago when Ford Motor Company introduced the Ford Granada and marketed it’s design as having been inspired by Mercedes Benz. Regrettably, we actually bought one of those for my wife. A Mercedes it was not. Lesson learned.

I don’t think you understand capital formation. The stock market is a vehicle companies utilize to raise equity capital which they invest in the business. Those investments create jobs which creates income for workers and taxes that flow to the government. Equity capital is the drive wheel of our economy. We’d be better off without government than we would without the stock market.

It’s a shame Amazon and Steve Jobs couldn’t get along better. I believe Amazon is following the philosophy Jobs had.

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When describing his period of exile from Apple — when John Sculley took over — Steve Jobs described one fundamental root cause of Apple’s problems. That was to let profitability outweigh passion: “My passion has been to build an enduring company where people were motivated to make great products. The products, not the profits, were the motivation. Sculley flipped these priorities to where the goal was to make money. It’s a subtle difference, but it ends up meaning everything.”

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Amazon is passionate about being the best online retail store available, even at the cost of immediate profits. Their products, especially the Kindles, and their customer service has always been excellent and continue to show that Amazon has their priorities in the right place.

It’ll be interesting to see how long Amazon keeps this price point before they run through the limit of bills they’re willing to set ablaze to stoke demand for the Fire. I’ve tried loosing a small amount of money on each sale thinking I could make it back by selling in volume but soon discovered that particular business plan was severely painful & faulty. (Hey… that kinda sounds like spiel Groupon tries to sell businesses, don’t it?)

I think reducing prices on a variety of products in hopes of making up the loss in volume is very different from selling a consumption device at a slight loss that guarantees a locked in customer on each sale.

I am concerned though that people will think the Kindle Fire is trying to compete with the iPad rather than being an ebook reader (and a web browser as an afterthought). Or worse, that Amazon will start thinking that.

It is not Apple, so it doesn’t matter. The Apple army will destroy them and leave them in their dust, like they have all others that have dared take on Apple. Ask HP how things are going. Steve Jobs made it his mission to destroy Google, Android and all those that joined that evil cabal, in his death, it has only made them stronger. Amazon’s days are numbered.